Happy New Year and Welcome to year 2017!
2016 has been a really rough ride indeed. One filled with ups (closing the year +8.5%!) and downs (scariest single month drop of -6.89%!) with many more traders missing the Trump Rally as they bet on the wrong side of the election. My single greatest achievement for the year has definitely been my prediction of the Trump Rally on the morning after election day in my pre-market report, a day where analysts big and small are expecting a “Black Monday” scenario, expecting the market to open as much as -500 points lower (what a joke! when will famous traders stop mixing their own political views into the market reality?). What I didn’t expect is that the market continued to rally strongly into new highs even after but the good thing as a trader is that we still managed to ride on to the market reality for more profits. All in all, a great year!
So, what is my outlook for 2017? (standby for a really long post…)
In order to arrive at my outlook for 2017, I will look at a behavioral analysis of the S&P500 over the past 11 years from 2006 to 2016 and then interpret that conclusion in the context of the current global and US market and economic situation.
When it comes to predicting stock market behavior, many investors believe in popular adages such as “How The First Week Ends, So Will The Month” or “How January Ends, So Will The Year”. How reliable are these sayings and could we rely on them to shed some light on how the First Week, First Month and the year of 2017 will turn out? Let’s take a look:
“How The First Week Ends, So Will The Month”
Over the past 11 years, it turned out that only 64% of the Januaries turned out to be correlated with how their first weeks closed. This means that only 64% of the Januaries closed in the same direction of the close of their first week. Making this a very very weak indication to rely on, so I am scrapping this from my mind. So, what can we rely on to predict how the first month of the year would close? Enters…
The January Effect is another “anomaly” I was taught in school and one which alot of professionals believe in due to strong real world reasons supporting this “anomaly”. Basically, the “January Effect” is a seasonal effect where Januaries tend to be positive due to tax-loss harvesting of professional traders and investors. Well, looking at the data, only 45% of the Januaries over the past 11 years has been positive. Yes, the January Effect is so debunked or at least no longer in effect due to changes in market structure over the past 11 years. Indeed, the past 11 years has seen so much changes in market structure, particularly in the rise of the individual traders due to access to better technology and education. So, that’s one more piece of education into my trashbin of stock market urban legends.
“How January Ends, So Will The Year”
This is an extremely popular adage that has been around for decades. In fact, I was even taught this in school! So, how true is it in light of the recent more volatile post 2006 market? It turned out that only 55% of the years ended the same way their Januaries ended! This was quite surprising for me as well. This is going into my trashbin of trading urban myths.
However, in looking through the data, one surprising correlation actually stood out…
Which is what I now call “How the First Week Ends, So Will The YEAR”! Yes, it is very surprising to see that 73% of the past 11 years closed in the same direction as the close of their first trading week! This is quite surprising but also understandable in light of the more volatile post 2006 market condition where the first month could actually be so volatile as to no longer valid how the first month close correlates with the performance of the whole year but that the dynamic moved forward to the first week instead. In light of this interesting find, how the market close this week could actually shed some light on how 2017 might end up. So, what does behavioral study suggest how the first week of the year might end?
Does the first week of the year tend to end positive or negative? Is there a strong behavioral tendency? Well, looking at the data, only 64% of the first weeks of the past 11 years had been positive ones. This isn’t a ratio which I would label as reliable. So, does the performance during the pre-New Year week predict the behavior of the first week of the year? Looking at the data, only 45% of the first weeks of the past 11 years went in the direction of the pre-new year week close. Another piece of data which isn’t significant enough to rely on for predictive purpose. So now we have a problem. It seems like there isn’t a behavioral tendency we can depend on to predict how the first week of the year might end up even though the performance of this first week has an extremely high correlation to how the year might end. One interesting fact to note here is that the final week of the year has only closed negative TWICE over the past 11 years, once in 2012 and now in 2016. And when the final week of 2012 closed negative, it led to a strong and positive first week of 2013. Even though this is but one piece of data which cannot be reliably counted on especially taking into consideration that the correlation study between the final week of the month and the first week of the year has been so very weak. But still something interesting to take note of.
Now, lets look closely at the technicals. The S&P500 has had a great run and is now in a kind of short term overbought condition which led to the profit taking that we saw last week. It broke its short term bullish support on the 10SMA and is now at its intermediate support on the 30MA. Within the framework of the short term and intermediate term bull trend that it is in, a visit to its 30SMA is a very healthy sign, especially since this is only its very first visit to the 30SMA since it turned a bull trend back in November 2016. This places the odds in favor of this week being positive as the market rebounds from the 30SMA, which also lines it up with the previous behavior we saw in 2012/2013. However, on the intermediate time frame, the market is still overall overbought and so we might see a pullback for the rest of the month even if the first week turns out positive. In fact, the retreat could be as far down as 2180, which is a 2.5% retreat.
Looking at the US economic data, there are two pieces of data I love to look at in order to predict market crashes and the bottom of crashes, which is the Unemployment Rate and the bond yield curve. In fact, this analysis helped me become one of the first to propose that the market was at a bottom back in 2009. Now, alot of analysts are telling me 2017 is going to be a terrible year. That we might see that market crash that we missed last year in 2017. However, I simply don’t see how the economy is going to do that. Prior to every market crash, we would see rising unemployment rate and a skyhigh bond yield rate but none of that is in the books at this time. So far, if I shut out all the doom and gloom talk about how Trump is going to destroy the world or how the market is going to crash, I see a very healthy US economy (in term of the numbers… sentiments on the ground may differ but ultimately, the numbers count) handing over to a very pro US business President with the stock market rallying unendlessly since that Presidency has been confirmed. I just don’t see any evidence to the contrary right now worthy of calling a crash.
Taking all of these into consideration, here is my predictions for 2017 (at long last):
First week of 2017 : Positive
First month of 2017 : Negative
2017 overall : Positive
Yes, this disagrees with soooooo many popular analyst out that that I am even more convinced that it is going to turn out to be the case! Are you armed with the knowledge to profit from all of these? Have you profited in 2016 like we did? If not, it is time to sign up for my Master’s Stock Options Picks service for just $1 and profit with me! Hurry!